While 401(k) plans have some good points, they also have a down side compared to a self directed IRA. It is suggested that anyone who wants to rollover an old 401(k) change over to a self directed IRA. There are many reasons for this and this article will help explain why it is better to roll over the 401(k) to a self directed IRA. One of the biggest reasons for changing the 401(k) over to an IRA, in the first place, is to allow for greater variety in investment choices. If changing over to a traditional IRA, a big part of the benefit is lost, as traditional types of IRA still have many limits on the type of assets you can invest in. The person rolling their 401(k) over should choose a self directed IRA, as it allows for full control of your money.

All IRAs are better than a 401(k) because 401(k)s are bound to your employer and their investment company. This means the company sets things up for the greatest benefit for itself and not for the greatest benefit of the person who holds the account. A self directed IRA is the best way to go as this type of account has a custodian that guides you through all the pitfalls and the rules, but does not control what happens in the account. When the account holder is not bound by other interests, there is no limit to the investments that can benefit the account holder. In conclusion, a self directed IRA is simply the best choice for rolling over a 401(k).

1. You get more investment choices and opportunity to better diversify.

2. Expenses may be lowered.

3. You can consolidate with other money which makes administration easier.

4. It is oftentimes easier to get if you need for an emergency.

5. Can covert to a Roth IRA if you qualify and if a Roth is appropriate.

6. You no longer have to worry about the financial stability, urge to merge or sale of your ex-company … and this is very important if your plan contains their stock. If your plan contains company stock investigate the tax advantages of rolling the stock out of the plan, paying the taxes on your basis and holding the stock outside the plan OR selling it immediately to get capital gains treatment. You’ll want to consult with a tax professional before acting.

7. Eliminates the chance of lump-sum distribution to beneficiaries in case of your death.

8. Avoids spousal consent if you want to change beneficiaries – of course this could be a disadvantage if you’re the dependent spouse.

9. Better manage the tax liability of your surviving spouse and/or heirs.

10 Ability to convert your money into a lifetime income you can’t outlive.

Here are some disadvantages of moving your 401(k) from an ex-employer:

1. Some states do not give the same creditor protection to IRAs that they do to 401(k)s. If this is important, check your state statutes.

2. If you have life insurance with your ex-employer as part of the 401(k) plan, you may lose it if you transfer the money.

3. If you plan to retire after age 55 but before age 59-1/2 you may have better lump-sum access to your 401(k) than to an IRA.

4. If you have a loan outstanding from your 401(k), it will need to be repaid prior to rolling over into an IRA.

5. You may have access to an investment inside your ex-employer’s 401(k) that will be lost if you roll over into an IRA, e.g., ex-employer stock that you think will continue to outperform other alternatives you could have.

6. Loss of spousal consent to change a beneficiary.

The roll over of your 401(k) plan at an ex-employer to an IRA makes a great deal of sense in the majority of cases; however, there could be circumstances that might make it better to stay put. Rolling over your pension money from an ex-employer should be undertaken with the advice and counsel of a financial professional that specializes in retirement planning. The process of assessing your options is fairly straightforward and, if action is needed, rolling over is easy and painless. If you are staying put because of loyalty to your lifelong employer, your sentiments are to be complemented; however, when it comes to your retirement savings, your first loyalty must be to you and your family. Most retirement planning professional agree that “money in employer-sponsored plans should go with you when you the leave the company”.

Should I rollover my 401(k) or 403(b) into an IRA?

If you wonder what to do with the 401(k) or 403(b) you will end up with because you’re leaving your employer, consider all your options so you can make a decision that fits your circumstances. Although 401(k) and 403(b) plans differ in some ways, the information below applies to both.

What are your options?

Leave the money in the current 401(k) if an employer allows that option. Roll the money over into an IRA. Transfer it into your new employer’s 401(k). Take the money and pay any taxes and, perhaps, penalty due.

The option you select depends on a number of factors and how they apply to your situation.

Investment Choices

It takes a variety of investments that perform well and have reasonable expenses to grow your money over time. Any plan should include mutual funds split among equities (stocks) that present value and growth; small, medium, and large capitalization; and domestic and international companies. Bond funds also should be part of the mix, split among corporate and government; short-term, medium-term, and long-term; and corporate bonds of investment grade and high yields.

Check on performance and expenses in your plan’s documents. Then compare that data with the rest of the market via Morningstar. If you’re not satisfied, consider transferring your money into an IRA account with a low-cost brokerage firm like Ameritrade, Schwab, T.D. Waterhouse, or Vanguard. All offer a variety of investment choices.

Need the Money Now?

Your 401(k) and IRA accounts are meant for retirement, but what if you’re in a temporary financial bind or are starting a business and need some cash? Loans from IRAs are not allowed, but loans from 401(k) plans are, provided the plan has a provision for it. If it’s allowed, generally you can borrow up to $50,000 or half of your account balance, whichever i lower; repayment is by equal monthly payments over five years. If you terminate employment, the loan is due immediately. Check your plan documents or with your plan administrator for the specifies, including fees.  If you default on the loan, income taxes are due, as is a 10 percent penalty for an early distribution. The loan interest you pay goes into your account because you are borrowing from yourself. But remember that you will be repaying the loan with after-tax dollars, and those same dollars will be taxed again when you start receiving retirement distributions.

Really Need the Money Now?

401(k) plans may have a hardship feature that allows withdrawal if you have a qualified hardship and you have exhausted other reasonable options. Withdrawals are taxable, and your ability to contribute to the 401 (k) is suspended for six months. Check out your plan documents for the details. IRAs do not have hardship withdrawal features, but you can take an IRA distribution and pay income taxes on that distribution. For both the 401(k) hardship withdrawal and the IRA distribution, if you are under 59.5% you will pay a 10 percent penalty, unless the money is for disability or certain medical expenses. In addition, a distribution from an IRA avoids the 10 percent penalty if it’s used to buy a first home ($10,000 distribution limit), to pay qualified higher-education expenses, or to pay health insurance premiums if you are collecting unemployment insurance.

Periodic Distributions

What if you’re not yet 59.5% and want to start taking distributions? If you terminate employment after reaching 55, your 401(k) may offer the opportunity to take distributions before 59.5%. These distributions are taxable, but the 10 percent penalty does not apply. Check your plan documents.

With an IRA, you generally have to wait until age 59.5% to take distributions without an early withdrawal tax penalty. However, distributions are taxable, but the 10 percent penalty does not apply. Check your plan documents.

With an IRA, you generally have to wait until age 59.5 to take distributions without an early withdrawal tax panalty. However, distributions can start earlier of they are part of a series of substantially equal periodic payments. These payments must continue for at least five years or until you reach 59.5, whichever happens later. Distributions are also penalty-free if they occur after death or disability.

Distribution to Beneficiaries

What happens to your 401(k) or IRA when you die?

After death, if your spouse is your 401 (k) beneficiary, they have several options, including continuing the 401(k) plan or rolling it over into their IRA. A nonspouse 401(k) beneficiary generally has to take a distribution for the entire balance (usually taxable) within a fixed time, usually five years. Again, details vary by plan, so check your 401 (k) plan documents.

With an IRA, your spousal beneficiary has similar options to continue the tax-deferred status. A nonspouse IRA beneficiary can stretch distributions over their lifetime. This benefit can be significant if your beneficiary is a child, as it teduces the immediate tax consequences and gives te money more time to grow.

Process Your assets

Federal law protects 401(k) plans from creditiors. IRA are governed by state law and may not be protected the same way.

Rollovers and transfers

If you rollover the 401 (k)  to an IRA, don’t have the check made out in your name – 20 percent will be taken out for federal income taxes. A direct transfer can help avoid this. Open your IRA first, then have the money transferred directly from your current 401 (k) to your new IRA. If your current 401 (k) cannot do this, then accept a check made out to the IRA, which avoids the 20 percent withholding, and then make sure it gets deposited into your IRA so it can begin working for you as soon as possible.